CRITICS SAY BOND ALTERNATIVE COSTS TAXPAYERS MILLIONS

Illinois taxpayers may be stuck with as much as $8 million in additional interest costs as a result of the state's increasing use of an obscure but politically expedient financing device.

Certificates of participation (COPs), a type of borrowing in which rents or other payments are pledged as security, have been used by the state in recent years as an alternative to conventional bonds to finance everything from new prisons to offices and phone equipment. Since 1988, Illinois has floated more than a dozen COPs totaling $176 million.

Gov. Jim Edgar's administration argues that COPs are a cheap and flexible tool that benefits taxpayers. But critics have charged that Mr. Edgar has a different motivation: He can issue COPs on his own authority, while a balky General Assembly must approve bonds.

Now, one of those critics, Illinois Rep. Jeffrey Schoenberg,

D-Wilmette, chairman of the House Appropriations Committee, has forced administration officials to grudgingly concede that COPs do cost more than bonds in one key aspect: interest charges.

What's still in dispute is how much more -- and whether those costs are fully offset by other savings.

Mr. Schoenberg asked the Chicago office of Dougherty Dawkins Inc., a Minneapolis-based investment banking firm, to examine the difference in interest rates between Illinois COPs and general obligation bonds. The firm looked at bond interest and price data for May 7, 1996 -- within one week of the dates when the state floated both a general obligation bond issue and a COP.

If the 37-basis-point differential were applied to the entire $176 million in outstanding Illinois COPs, taxpayers would end up paying $7.66 million more in interest than they would have had the projects had been financed with general obligations bonds, according to Doherty Dawkins Senior Vice-president Bill Morris, a former state senator.

The higher COP costs are to be expected, Mr. Morris notes, because general obligation bonds are secured by the state's full faith and credit, while a construction COP, for example, is backed only by rent the state pays to lease a building.

Rep. Schoenberg, who has alleged in a suit filed in Cook County Circuit Court that COPs are an unconstitutional end run around the Legislature, termed Mr. Morris' findings "clear and compelling evidence that COPs are inherently more costly."

Another expert supporting Mr. Schoenberg's interest-rate findings is William Hall, executive director of the Economic and Fiscal Commission, the General Assembly's economic research arm. He said a draft report by the panel has found higher costs "similar" to 37 basis points, at least for certain COPs.

But Michael Colsch, deputy director of the Illinois Bureau of the Budget, pegged the additional interest cost of COPs much lower -- 10 to 15 basis points more than general obligation bonds.

Messrs. Colsch, Hall and Morris all caution that interest costs are not the only factor worth considering.

Mr. Colsch, for instance, said the governor felt that public safety needs compelled him to issue COPs to build new prisons last year after a political dispute blocked General Assembly passage of a prison bond issue.

He notes that COP-financed buildings remain on property tax rolls until the state takes title at the end of the lease, and the buildings are maintained by less-expensive private services rather than state workers.